I'm having the same problem but I think I know what the answer is. The string <?xml version=blahblah> should be on the first line of the output, but there's an extraneous line feed. That tends to upset IE and many of the newsreaders (I've tried MyYahoo! and a few others and they doesn't like the output either).
If you take the RSS output and put it in a text editor, then remove the extraneous empty line at the top, the newsreaders like the xml file then.
I've been combing through the code to see who's outputting the extra line feed before the xml tag, but haven't found it yet. I'll keep looking and post what I find if I find it.